Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2013

Goodwill and Other Intangible Assets

6. Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. The company’s reporting units are its operating segments, which subsequent to the change in the company’s organizational model during the first quarter of 2013 are discussed below.

During the second quarter of 2013, the company completed its annual test for goodwill impairment. The company used a “step zero” qualitative test to assess eight of its ten reporting units. The estimated fair values for seven of the eight reporting units using “step zero” testing substantially exceeded their respective carrying values. While Global Energy had low headroom due to the recent acquisition of Champion, the company considered “step zero” analysis to be sufficient due to continued strong qualitative indicators. Global Energy’s headroom before the Champion acquisition continued to increase since the prior year assessment. Based on the “step zero” testing performed, no adjustment to the carrying value of goodwill was necessary.

The company elected to utilize a “step one” quantitative test for Global Water and Global Paper given the lower headroom between fair value and carrying value. These reporting units have lower headroom as they were acquired as part of the Nalco merger in December 2011. The headroom for these reporting units has continued to increase since the prior year assessment. Based on the “step one” testing performed, no adjustment to the carrying value of goodwill was necessary.

If circumstances change significantly, the company would also test a reporting unit’s goodwill for impairment during interim periods between its annual tests. Based on the current performance of the company’s reporting units, updating the impairment testing during the third quarter of 2013 was not deemed necessary. There has been no impairment of goodwill since the adoption of Financial Accounting Standards Board (“FASB”) guidance for goodwill and other intangibles on January 1, 2002.

The merger with Nalco and the acquisition of Champion resulted in the addition of $4.5 billion and $1.0 billion of goodwill, respectively. Subsequent performance of the reporting units holding the additional goodwill relative to projections used for the purchase price allocation of goodwill could result in an impairment if there is either underperformance by the reporting unit or if the carrying value of the reporting unit were to fluctuate significantly due to reasons that did not proportionately change fair value.

Effective in the first quarter of 2013, the company changed its reportable segments due to a change in its underlying organizational model designed to support the business following the Nalco merger and to facilitate global growth. The company did not operate under the realigned reportable segment structure prior to 2013. The company’s new segment structure focuses on global businesses, with its ten operating units, which are also operating segments, aggregated into four reportable segments as follows:

· Global Industrial consists of the Global Water, Global Food & Beverage, Global Paper and Global Textile Care operating units.

· Global Institutional consists of the Global Institutional, Global Specialty and Global Healthcare operating units.

· Global Energy consists of the Global Energy operating unit.

· Other consists of the Global Pest Elimination and Equipment Care operating units.

Based on the changes in the company’s organizational model, the company has updated its goodwill allocation for December 31, 2012. The company finalized the allocation during the second quarter of 2013. No impairments were noted in connection with the goodwill allocation procedures performed.

The changes in the carrying amount of goodwill for each of the company’s reportable segments during the nine months ended September 30, 2013 were as follows:

	Global			Global			Global
(millions)	Industrial			Institutional			Energy			Other			Total
Goodwill as of December 31, 2012	$	2,751.6		$	720.6		$	2,325.3		$	123.0		$	5,920.5
Current year business acquisitions(a)	33.3			—			1,021.1			—			1,054.4
Business divestitures	(2.1		)	—			—			—			(2.1		)
Effect of foreign currency translation	(67.0		)	(17.3		)	(72.7		)	(3.0		)	(160.0		)
Goodwill as of September 30, 2013	$	2,715.8		$	703.3		$	3,273.7		$	120.0		$	6,812.8

(a) For 2013, none of the goodwill related to businesses acquired is expected to be tax deductible.

Other Intangible Assets

As part of the Nalco merger, the company added the “Nalco” trade name as an indefinite life intangible asset. During the second quarter of 2013, using the qualitative assessment method, the company completed its annual test for indefinite life intangible asset impairment. Based on this testing, no adjustment to the $1.2 billion carrying value of this asset was necessary. There has been no impairment of the Nalco trade name intangible asset since it was acquired.

The company’s other intangible assets subject to amortization primarily include customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. Total amortization expense related to other intangible assets during the third quarter ended September 30, 2013 and 2012 was $79.0 million and $59.3 million, respectively. Total amortization expense related to other intangible assets during the nine months ended September 30, 2013 and 2012 was $214.1 million and $178.0 million, respectively. The increase from 2012 to 2013 is primarily due to the Champion acquisition.

As of September 30, 2013, future estimated expense related to amortizable other identifiable intangible assets is expected to be:

(millions)

2013 (Remainder: three-month period)	$	78
2014	304
2015	300
2016	295
2017	292
2018	287

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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